Banks cash in on pix

Berlin Film Festival 2012

If the vitality of film banking reflects the health of the independent production sector, then there are plenty of encouraging signs despite the ongoing turmoil in the global financial system.

After the shake-out following the credit crunch in 2008, the stalwart lenders who stuck with indie film through thick and thin, such as Union Bank of California, Comerica and City National Bank, are reaping the reward with expansion in their business.

At the same time, Wall Street’s capital markets are waking up again to the opportunities offered in the more risky but also more rewarding areas of gap and mezzanine finance.

“It’s an optimistic time now, and will become more optimistic in the next year,” says Myles Nestel, the former banker who recently launched sales and financing venture the Solution Entertainment Group in partnership with veteran sales agent Lisa Wilson.

Union Bank, the market leader in single-picture financing, is expanding its entertainment team under senior VP Bryan LaCour after a record year in 2011, when it doubled its deal volume to $800 million from its previous average of $350 million-$400 million. With 33 transactions in 2011, against a typical annual figure of around 20, the average loan size was also significantly higher.

“We’re seeing a lot of big-budget opportunities, $50 million-plus productions, which is very attractive to us,” says LaCour. “It’s reflective of the demand in the foreign market for bigger independent films. Independent producers are filling the void that the studios are leaving in the marketplace.”

LaCour is encouraged by an unexpected degree of stability in the foreign distribution sector.

“Over the past couple of years, we’ve been pleasantly surprised by how well the market has held up, and how solid the payment history has been. We anticipated a large amount of defaults that haven’t occurred,” he says.

Nonetheless, Europe’s sovereign debt crisis casts a shadow of uncertainty over the coming year. “We’re all closely watching the European situation. We all don’t quite know how that will affect things,” LaCour notes.

National Bank of Canada has signalled its ambition to expand into Hollywood and further afield by hiring Lisa Wolofsky last year as manager of gap and international financing in its entertainment unit. She brought her specialist expertise from Quebec gap finanacer Fidic.

The bank, recently named the safest in North America by Bloomberg, already has the continent’s biggest entertainment group, established in 1998, but had previously confined its activities largely to Canada, and had never previously done gap financing.

“(My) hiring is really a statement of how aggressive they want to be,” Wolofsky says. “They are very eager to get into this area, and with the strength of the bank and the expertise of the 35 account managers, they are able to be a major player.””We are a Canadian business primarily backing Canadian production, where we already have a very large share of the marketplace, but the main target for expansion is the U.S., though we’re not limited to that. At the moment we are financing a project being filmed entirely in Australia.”

Recent U.S. projects financed by NBC include Robert Redford’s “The Company You Keep” and “The Words” starring Bradley Cooper.

“What differentiates us from other banks is that I have a holistic approach to the analysis of projects,” Wolofsky says. “Gap is about working with top quality companies that can provide sales estimates, and about judging the creative elements of the project. We read the scripts, we look at all the creative elements. We’re not just applying a financial formula, you have to do your due diligence just like an equity player.”

East West, the largest bank based in Southern California, has made its move into film by hiring Tom Garry, who left Citibank last year when it withdrew from the sector. OneWest, also based in SoCal, has tapped another veteran, Joe Woolf, to spearhead its entry.

Boutique lender 120db, run by another banking vet, Peter Graham, is also ramping up its activities after raising a $107 million fund from an insurance company last November.

Offering traditional banking services — discounting pre-sales and tax credits, plus gap financing — 120db aims to be faster than a large institution. “We’re the FedEx of finance, slightly more expensive than a bank but if you need to get it done by the start of principal photography rather than the end, we’ll do it quickly,” Graham says.

“Raising the $107 million hasn’t meant any change in what we do, but it enabled us to lower our rates. We’re still fast, with no committee to go through, but we dropped our rates by 30%, so our pre-sale rates are now only a little higher than the banks, and our gap and tax credit rates are the same.”

120db had specialized in the lower-budget end of the indie spectrum, with three pics in Sundance this year: “Bachelorette,” “Liberal Arts” and “Predisposed.” But its fresh fund and cost structure is enabling a move up the budget scale.

“We’re currently looking at a $12 million loan request from Australia on a $45 million project, that they need to get done in a month,” Graham says. “Producers will pay a little more to close on time.”

Silver Reel, a Cayman Islands debt fund run out of Switzerland, managed by U.K.-based Ian Hutchinson, is also gravitating toward bigger international films.

“What’s changed in the past 12 months is that we are looking more to America for projects,” notes Hutchinson. “It’s very dangerous in the middle range, with films that are highly execution-dependent, so we’re focusing on high-end projects with A-list cast and the premier sales companies.”

He notes that “films which 12 to 18 months ago may have been made by the studios are now being made by independents. At Cannes last year, we saw a lot of big-budget projects outside the studio system, like ‘Looper,’ ‘Cloud Atlas’ and ‘The Wettest County,’ and several sales companies sold out on the back of that. At Toronto as well, we saw some very high-profile U.S. domestic acquisitions.”

It also backed Wechsler’s U.K.-based sci-fi project “Under the Skin,” directed by Jonathan Glazer and starring Scarlett Johansson, which FilmNation is selling, and is negotiating another project with Silver.

“We’re trying to find producers like Nick Wechsler and Joel Silver to work with more than once,” Hutchinson says. “There’s a limited number of films we are interested in financing. One of the big dangers for debt financiers is having too much funding which you must spend.”

Other specialist lenders include U.K.-based Aegis, which attracted fresh investors on the back of its success with “The King’s Speech,” and now has over $150 million under management. Santa Monica-based Grosvenor Park has also reportedly raised $100 million to return to film lending, three years after it exited the business in the credit crunch.

Nestel and Wilson’s L.A.-based Solution Entertainment Group is aiming to be an aggressive new mezzanine player, with its financing capacity tied to its own foreign sales operation. “It’s a natural evolution, in terms of protecting capital, to be in control of your own sales,” Nestel says. “Wall Street wants to know that you have skin in the game.”

He believes the foreign market is on the upturn, and institutional investors are responding.

“We’re through the worst of the recession,” he argues. “The capital markets are taking a serious look at the film space again. I don’t think you’ll see a ton of new entrants, but the tide has turned on lending, and in the next year you’ll see more institutional capital coming into this space.

“It won’t be a radical explosion like five years ago,” he cautions. “People are being more sophisticated than before. In the old days, there was such a supply of capital, a lot of films got made that shouldn’t. Now there’s a striving for quality. There will be a defined capital placement into companies that have management teams who know what they are doing. And because there’s not a huge supply of capital, only the best projects will get made.”